Bedokian Portfolio Blog’s Fifth Anniversary (Short) Message

Today marks The Bedokian Portfolio blog’s fifth anniversary. 

It has been more than a year and a half since the COVID-19 outbreak, and we are still seeing second or third waves cropping up in parts of the world. Vaccination is in full swing in most countries as governments want to protect its citizens from the virus and bring back normalcy in daily lives. 

 

Despite all these happening, we are seeing the rapid recovery of the financial markets; as of 29 July 2021, the S&P 500 had gone up slightly over 90% since its lows back in March 2020. Similarly, the local STI index had gone by about 30% in the same period. Some see it as a divergence which indicated a sort of mismatch between the state of the economy and the markets, which implies a bubble. Others view sectoral/regional play is at work here and capital just flow from one sector/industry/region/country to another.

 

Whatever it is, we should always go back to the basis of portfolio management, and that is diversification. Regardless of whether tech is facing a slowdown, or a country’s sector is being regulated and facing relegation to a non-profit model, being diversified meant that you are protected from being over-exposed to a certain asset class, region/country, sector/industry, company or events/occurrences.

 

And this is my fifth anniversary message.

 

Stay diversified, stay safe.

Rebalancing Bob’s Bedokian Portfolio

Bob had done his rebalancing on 30 June 2021, which I had reflected here, with another SGD 5,000 injection.

Bob had opened another brokerage account for the purpose of investing in overseas securities. For his inaugural overseas investment, Bob had purchased five SPDR S&P 500 ETF (SPY) shares as his first step into the U.S. market. 

 

Also, he had added some positions to the ABF Singapore Bond ETF, given the decline of its price in the last six months.

 

In a related development, from 30 June 2021, the SPDR Gold Shares ETF can be traded in both USD and SGD on the Singapore Exchange¹, which means going forward, Bob could choose either currency for his gold ETF.

 

1 – SPDR Gold Shares ETF Now Traded in Both USD and SGD. SGX.com. 29 June 2021. https://www.sgx.com/research-education/market-updates/20210629-spdr-gold-shares-etf-now-traded-both-usd-and-sgd (accessed 3 July 2021)

Diversifying Time?

While managing an investment portfolio, we need to consider diversification. Be it asset class, regions/countries, sectors or even companies, diversification helped to spread the risk across positions. Hence, we have the adage of “do not put your eggs in one basket”.

 

We can do our due diligence in diversifying by selecting appropriate investments to fit our portfolio, there is one asset that, despite our best efforts to “control” it, it is not possible to do so.

 

And that asset is time.

 

Different investment portfolios, as I had stated before, perform well at different points of time, e.g., a United States (U.S.) based 60/40 equities/bond portfolio performed better than the U.S. based Bedokian Portfolio between the years 2011 and 2020, but it is vice versa for the 2001 to 2010 timeframe.

 

And that is not all; what if we decided to drawout the portfolio and it so happened on a very bad year, like in 1997, 2009 or 2020?

 

The Future Is Unpredictable

 

The key thing about why time as a variable is hard to gauge is because of its unpredictable nature. When most of us were young, we held lofty ambitions and goals; fast forward till now, I guess most of us did not achieve those dreams due to circumstances and experiences. Let alone a 10-year investment plan, we do not know what is in store for us at the end point.

 

In these situations, how do we really protect our investment portfolios to withstand the test of time? Short of just waiting for your portfolio to get better, there are a few ways, though all are not totally robust, but at least they can give some fighting chance in protecting your monies.

 

#1: Staggered Portfolios

 

Instead of starting an investment portfolio at a point in time, why not create one or two others at different points of time down the road, say at a few years later? To begin, first create a portfolio a year zero, then start off the next portfolio when there is a prolonged market pullback. If you can afford, create a third portfolio at another later pullback. You can adopt the same portfolio make-up for both or all, or do different ones (e.g., Bedokian Portfolio as the first portfolio, then the 60/40 equities/bond for the next).

 

This is a good form of diversifying time, and the plus point is pretty obvious; you can choose the better/best performing portfolio to drawout first years later, and can afford the time to wait for the other(s) to reach their deemed high before liquidating them.

 

The minus points are the opportunity cost of storing the cash for the next portfolio(s) and the large capital outlay in servicing the portfolios. If planning is done properly, new capital can be raised in the years leading to the next portfolio, while still injecting monies piecemeal into the current one.

 

#2: Low Volatility Portfolios¹

 

Low volatility portfolios tend not to have extreme up and down movements due to its non-correlated features of the asset classes in their make-up. They usually display lower standard deviations and/or drawdowns and the growth of the portfolios are relatively steady. With formulas that utilise the standard deviation, like the Sharpe and Sortino ratios, their scores of the said ratios are comparably higher.

 

The advantage of such portfolios is that on an annual basis, the positive returns were quite respectable, and the negative returns were not so disastrous (around single digit based on my findings). The disadvantage is that generally, the overall returns were somewhat lower than portfolios with higher standard deviations and/or drawdowns.

 

Thus, the compromise of low volatility portfolios is the assurance of having some growth with little deviation over having better returns that comes with a roller coaster ride. They are, in my opinion, are suitable for passive investors with very low risk tolerance/appetite.

 

#3: Sector/Region/Country/Market Rotation

 

An active investment strategy, sector rotation involves the movement of investment monies from one sector to another. Rather than sitting tight on a mix of sectors regardless of economic conditions, rotating to different sectors is seen to generate more returns as the capital is shifted from down or loss-making ones to those which are rising in the prevailing market period.

 

Like sector, regions and countries can be rotated, too. Even though the various economies in the world are interlinked with one another, there are bound to have instances where one part of the planet is doing better than the other. Related to this point would be the shift between developed, emerging and frontier economies and markets. With rotation, in theory we are capturing the “best moments” and the returns would highly likely be in the positive side.

 

Although this is one of the ways of diversifying time, time itself is also this method’s disadvantage, specifically timing. You may know of some strong and/or seasonal indicators to point to one or a few sectors/regions/countries/markets, but if the shift was short-lived and/or when you are in the last to jump on the bandwagon, then you may be caught off-guard.

 

Conclusion

 

Diversifying time is understandably a tricky business, since we really do not know what the future really holds. Some of the mentioned methods are based on past data, in which ironically does not take the future into account (so it goes “past performances are not indicative of future results). Still, we need some form of hedge, and having this hedge is better than none.

 

Disclaimer

 

1 – Backtesting of Harry Browne’s Permanent Portfolio and Ray Dalio’s All-Weather Portfolio using statistics from Portfolio Visualizer (www.portfoliovisualizer.com)

 

REIT Mergers And Blurred Sectoral Lines: Shall I Go For A REIT ETF Instead?

The period of 2019-2020 had seen some of the big REIT mergers. To name a couple, we had the merger of CapitaLand Mall Trust and CapitaLand Commercial Trust, resulting in CapitaLand Integrated Commercial Trust, and OUE Commercial REIT absorbing OUE Hospitality Trust.

The concept of merger has its advantages. When REITs merge, there will be economies of scale in managing the whole thing, whether on debt management or acquisition of new assets. There is also the notion of size: the bigger a REIT is, the bigger its market capitalization would be, and of course the better its liquidity in the market.

 

From a retail investor’s point of view, such mergers may blur the lines between the different types of REITs, and with some observers expecting more mergers, the next obvious question will be: wouldn’t it be better to just buy a REIT ETF?

 

This is an interesting question to ponder, and I can already see two distinct plus points in going this way. The first will be no administrative hassle for the investor when it comes to mergers. Rather than the individual investor counting how many units of the newly merged REIT entity he/she will be getting (and calculating how many units to purchase to make the holdings a round number), the ETF manager would do all these behind the scenes. The second plus point is greater diversification: if REIT mergers bring about diversification of the assets, why not getting a bigger diversified “universe” covering these merged REITs via ETF?

 

However, going through the ETF way has its minuses, too, and surprisingly they are related to the advantages in the previous paragraph. The main crux is the lower expected returns in investing through an ETF rather than owning REITs direct (though this may not be the case across all instances). Firstly, managing an ETF requires expenses, which translates to the total expense ratio (TER) (and yes, this includes the ETF manager doing the “administrative hassle” as stated above). The TER is calculated as an annualized percentage of an ETF’s assets, and over the long run it may impact returns. Also, the diversified nature of an ETF meant that the returns and yield are averaged from across its holdings.

 

So, what is the conclusion? As always, my answer would be “it depends”. In investing, there are many styles and methods to it, just like there are different individuals with different preferences and risk appetites. In deciding on whether to go for REITs or ETFs (or both), you would still need to consider other points beyond my abovementioned pluses and minuses.

 

If you want to be an active investor and have more control, then you can go for REITs direct. If you are a passive investor who just rebalances your portfolio once or twice a year, then the ETF path is good (and save the headache of missing corporate actions related to mergers). The third way is to go for a core-satellite approach, and that is owning both REIT ETFs and REITs themselves, and for this you would need to be an active/passive hybrid investor.

 

Remember, there is no correct way in investing, for “correct” is a subjective word in this field.

A Structured And Holistic Way To Learn Investing: Supplementary

After my post on the above topic came out, I have had encountered numerous queries in this area. The questions were varied, but after aggregating I could group them generally into three categories. There were some which were unique to the individuals’ situations, so I would leave them out.

 

Category #1: Is it OK to attend courses?

 

This was the most common line of questioning I got, which I believe it stems from my post’s biasness and impression on self-learning via available offline and online resources.

 

I do recognize the differences in every individual’s learning styles and methods; some prefer to go through on their own, while some prefer someone to guide them along, and others may want to have a hybrid of the former two.

 

As emphasized in the earlier post, not all courses are suitable for everyone, as the course structure may have a few assumptions in place, like the participant having some underpinning knowledge of certain topics to be taught. Imagine a newbie who had never invested before learning about fundamental analysis; if he/she has a business/finance/accounting background, that is fine. If not, however, he/she would be confused even by the words “debit” and “credit”.

 

For my case, I did attend a course to further my knowledge on investing and the things related to it (see here on my experience in attending Nanyang Poly’s Specialist Diploma). In my opinion, the course option would be suitable after you had completed Stage Two, where you had at least mastered the required info needed for investing and be ready on what the trainers/lecturers will be talking about. You can take courses in advancing and obtaining Stage Three knowledge, and/or Stage One/Two to reinforce on what you had learnt and/or fill in the gaps that you may have missed.

 

Category #2: Different materials telling me different things on investing. Which should I follow?

 

In our primary and secondary academic education journey, most of us were used to having absolute answers to questions, e.g., 1 + 1 = 2 and hydrogen + oxygen = water. The trouble about investing is that there is more than one way in going about it, and the range of results obtained is infinite.

 

To start off, my Bedokian Portfolio make-up already differs from other known portfolios like the 60/40, Bogleheads’, etc. Or for fundamental analysis, there are many ways in valuing a company. Especially if you are learning from the ground up, you will find that many authors, writers and bloggers have different methods, styles and means, and their results are vastly different.

 

Frankly, there is no one ultimate answer in the world of investing, and the reason why is that the factors in play that govern the answer is in a constant flux. Add in different perspectives from various players, it is as random as you can get.

 

My answer to this category is, after going through Stages One and Two, find one methodology and style that you are comfortable with, and stick to it. It could be from a single source (e.g., 60/40 equity/bond) or a mix like the Bedokian Portfolio (which itself is cobbled from a few portfolio make-ups and investing styles). Tweaks and adjustments are OK as you go along, but try not to deviate drastically from the original, e.g., from 60/40 equity/bond into 50/50 crypto/cash.

 

Category #3: Do I need to know “everything” related to investing?

 

The word “everything” here is a cumulation of styles, methodologies, financial instruments, strategies, etc. A couple of examples would be like “do I need to know fundamental analysis if I opt for passive investing” and “do I need to know about options and futures”. Basically, it is a question of whether we need to have every ounce of investing knowledge stuffed in our brains.

 

While the theories behind learning, knowledge and application warrants a separate reading, I can put it simply in the following “knowledge tiers”, namely:

 

• Tier 0: No knowledge of the topic
• Tier 1: Heard of the topic
• Tier 2: Understand the topic
• Tier 3: Able to apply on the topic

 

Ideally, we should go for Tier 3 in all aspects related to investing, though it is not necessary. Depending on individual preferences, one can get started in investing with just some Tier 3 and others Tier 0. I have met a seasoned investor who knows nothing about option strategies, and I have also seen a passive fund investor with zilch accounting knowledge. Both are currently doing well in their respective investments.

 

Using the Stages in the previous post, for active investing, my preference would be at least Tier 2 for Stages One and Two to start, and at least Tier 1 for Stage Three going forward. For passive investing, you can afford to go Tier 1 for topics like accounting, economics and fundamental analysis, and Tier 2 for portfolio management and asset classes. 

 

While I had recommended the basic level of investment knowledge, do not just stop there. Learning, like investing, is a journey, and I hope you could pair these two together going forward.

Managing Your Family Portfolio

I had just done up a quarterly review of our Bedokian Portfolio, which typically includes a (very) short briefing to my stakeholders (namely my spouse) on the transactions, portfolio performance and goings-on for the past three months. It is also during this time that I distributed the dividend and interest payments received over the past quarter to the respective stakeholders’ share of the portfolio. As you can see, our Bedokian Portfolio is not just solely mine, but also made up of funds from my spouse and my kids.

It is easy to manage an investment portfolio if the monies inside are 100% yours, but it gets a little bit tricky where you are managing not just your own but other people’s monies, too. By “other people”, I meant close family members, so please do not go around and ask your friends, acquaintances or even strangers whom you just met on the train to manage their investments; it is not right, legally and ethically.

 

Back to topic, for our Bedokian Portfolio, the share of and contributions into it are recorded and segregated according to each of our family members who have a stake in it, yet when it comes to investment decisions and actions (such as buying and selling of securities in the portfolio), these funds are viewed as a common pool. This allows easy management and also ensure that returns and risks are borne equally across based on each family member’s proportion of it.

 

The above would work if your family members have the same risk appetite as yours and agreed that there would be one person making the investment call. Trust is paramount here. For our case, I would still discuss with my spouse before making a buy/sell decision.

 

If you are interested in setting up an investment portfolio with monies from your family members, here are some guidelines that I am using which may help you:

 

Guideline #1: Agreement And Consensus

 

Even though the contributors to the investment portfolio are close family members, agreement and consensus must be reached before putting in the first dollar. Of course, the notion of “come on, everyone is family, no need for such things” cannot go wrong, but when crisis times hit such as a falling market, things will start to get ugly. To make it more formalized and watertight, come out with a written agreement to reduce misunderstandings and disputes (I did not do this though). In a family-managed portfolio, it is advisable to have only one, or the most two, members calling the shots, taking the role(s) of fund manager or co-fund manager, respectively.

 

If the expectations of returns and/or risk appetites among the family members are not similar and aligned in the first place, then it is prudent not to initiate the joint portfolio at all. I had seen and heard of real-life couples and families with each member having their own investment portfolio and not pooled with one another’s due to differing returns expectations and risk profiles.

 

Guideline #2: Disclosure And Discussion

 

It is very important to be transparent on everything; family members whom they are, but when it comes to money and funds, everyone will have an interest in it. As I had shared above for our case, at the end of every quarter, I will provide a brief summary on portfolio matters, and at the end of the year, I will share on the recent quarter and the year in general.

 

It is at this juncture you may want to open up questions and suggestions from the portfolio members after the briefing. Such sessions must be constructive, and not of trivial stuff (unless they are held over coffee or dinner). Things like looking at a particular region/country/sector/industry, some upcoming new securities, or even alternative, cheaper brokerages can be discussed.

 

Guideline #3: Contributions And Payouts

 

As the portfolio’s funds are a pooled resource, we need to have proper procedure on this aspect. Recognition of each member’s share of the portfolio is important and must be right up to the nearest cent. Contribution wise, to prevent the issue of time in the money (e.g., “my money is in the portfolio longer than yours, why my payout is lesser?”), a periodic injection is recommended.

 

While handling payouts, it is best to ask the members if they wished to have an accumulating (reinvesting of dividends/interests) or distributing (receiving dividends/interest in cash) at the get-go. Either way, calculation to the last cent is crucial so as to ensure fairness to all, and if there are instances where rounding has to be done, it is better to state upfront how this is to be handled.

 

The best time in my opinion to have contributions and distributing payouts would be during the aforementioned briefing sessions in #2 (which I had also stated in my opening paragraph). That is where everyone is around and things can get done on the spot (there is always Paynow), so there is lesser room for arguments.

 

 

The above guidelines are, in my opinion, equitable from the point of stakeholders and portfolio administration. As usual of my guidelines, it is not set in stone, and feel free to modify to suit your situations as you deem fit. 

A Structured And Holistic Guideline To Learn Investing

From time to time, I have had encountered people who were asking on how to start and learn about investing on online forums, chatgroups and amongst my circle of friends and acquaintances. Over time, the two most common answers emerged are to either learn oneself through online and offline resources such as YouTube and books, or to sign up for a course (or a few). 

While I understand the good intentions and advantages behind these answers, both also had their own minus points, too. For the self-learn path, there is a risk of the learner being overwhelmed with information, especially when he/she is new to investing. In addition, the contents may not be curated to the learner’s level of knowledge, so there is this feeling of being “lost” with all the concepts and jargons abound. On the other hand, courses do help in making sense of the topics in a more organized way, but the caveat is that not all courses out there are really that suitable for all individuals. Even worse, some of the courses out there might be fleecing you instead of really helping.

 

Furthermore, unlike hard sciences where item A and item B will give you item C (e.g., hydrogen + oxygen = water), the realm of investing is not so clear cut. Every factor and variable are inexplicably linked to one another, and there is no way we can get a certain outcome even from combining just two factors/variables together.

 

As part of my day job involves training, I understand the need to have a structured training program in learning new stuff. However, since investing is not hard science, learning about it does not give you the desired outcome you will get. Therefore, the key approach in learning about investing is to provide the necessary knowledge and techniques to better prepare oneself in the world of investment.

 

I have cobbled up a structured learning guideline on how to go about investing. Since this is a guideline, it is not a set-in-stone process to follow, but to me this is how I feel it should go and it is also a holistic approach. I would like to emphasize three main points: first, there is no short-cuts in learning, and it is better to be patient in taking time to know more stuff than to just jump into the deep end of the pool. Second, learning does not mean guaranteed results, but at least you are better armed with the knowledge and techniques than others who had no clue on what is going on. Third, learning, like investing, is a lifelong journey, so stay learned and stay invested.

 

The structured learning is consisted of three main stages. Bear in mind that these stages are not one-way and you are encouraged to go back and re-learn and re-read the topics as a form of refresher and/or provide you with a new outlook at things. If the topics are a bit too complex for you, you can start off with the Dummies Guide series and/or look them up online (Investopedia, www.investopedia.com, is a good starting point).

 

Stage One: Economics, Asset Classes, Accounting and Finance

 

Economics is the basic understanding of why and how the financial markets work and behave. It is the underlying premise and reason on the whole scheme of investing.

 

Asset classes are the various components that make up the markets, and why their characteristics and behaviour will affect one another. Along with asset classes, you can read up on the various sub-asset classes, too, like sectors, types of bonds and commodities, etc.

 

Accounting and finance are knowing and understanding not just the numbers behind the corporate entities that make up the markets, but also your own situation in terms financial planning.

 

Stage Two: Securities, Portfolio Management, Fundamental Analysis

 

Securities, in particular the plain vanilla ones like shares, bonds and exchange traded funds, are the various financial instruments that you can invest in and they are a reflection of the asset classes learnt in the previous stage. 

 

Portfolio management is about planning and arranging the securities from the various asset classes in order to balance between returns and risk. 

 

Fundamental analysis is key as you need to delve into the accounts of the listed corporates, perform ratio analysis (this is where accounting and finance comes in useful) and understand how the economy will impact them (economics).

 

It is at this stage that investing styles and methodology will start to deviate, due to the learner able to understand more of the whole works and also his/her own preferences and risk appetite. Some may like to have only two asset classes, while others may want more. Some may want to go passive investing, some active, and others a hybrid of both. This is the part where you need to find your place and stick to it.

 

Stage Three: Derivatives, Advanced Reading

 

Derivatives are another set of financial instruments and I view them as an advanced form of the plain vanilla securities learnt in Stage Two. Things like options, futures, contracts-for-difference, etc. are considered derivatives and a clear understanding is important on how to use them. It is not necessary to use them if you are not comfortable, but at least basically know how they work.

 

Advanced reading is the step of knowing more and beyond your current level of knowledge obtained from the past two stages, and I have to admit this part will be a bit dry for some as it involves academic and statistical material, and the real nitty-gritty on how certain things work (by things, I meant sectors, industries, geopolitics, etc.). A bit of history is included here, too, as reading up on past happenings in the economy and markets may provide some form of clue of what had happened in the past and what may happen in the future.

 

There are some side-learning that you can do, too, like how to use the brokerage apps and tools, back-testing your own investing methodologies/styles, or even technical analysis. These can come in at Stages Two and Three, where you can apply these on the topics covered there.

 

As I had mentioned before, this is just a learning guideline which I hope you will find it useful. Feel free to modify it or do not follow if it is not suitable for you. There is no hard and fast rule in learning, but constant learning and re-learning is important.

 

Stay learned and stay invested.